What Is Decentralized Finance (DeFi) and How Does It Work? : Nowadays the name of DeFi is being discussed a lot in recent times. Because all the cryptocurrencies available in the crypto market are decentralized, due to being decentralized, no one has control over the coin, peer to peer technology is done in it, so there is a lot of curiosity among the people.
To know what is DeFi? How does DeFi work? What is centralize and decentralize in DeFi and what is the difference between the two. Through this post, we will try to give you complete information about DeFi. Do you know about the technology behind DeFi, if yes then you will find it easy to understand this post.
What Is Decentralized Finance (DeFi)?
DeFi means decentralized finance system. Which is based on Blockchain. There is no such system of bank, cash, in Defi, in this users are called users in English, they use most peer to peer i.e. person to person transaction. So that they do not need any mediator (bank). In decentralized finance, a bank is a replacement. The entire transaction algorithm of the DeFi system is based on Blockchain technology. The smart contract completely removes the paper work which is unnecessary. Which is used to fulfill the traditional contract.
The cost of the transaction varies according to the blockchain technology. Blockchain is a digital decentralized, public ledger account that exists on a network. All transactions done by users on DeFi are stored in the database. Due to this there is more transparency in the transaction. So that everyone can see based. In DeFi, KYC is not read like a bank. It provides privacy and security to its users regarding transactions. If you have a crypto wallet (Metamask), you can start using DeFi.
How does Decentralized finance (DeFi) work?
Unlike centralized finance which is built on decentralized and open source blockchain, where there is no central authority, no financial institution, then with this defi gives us access to technological products.
In which any person can participate freely. With the help of open source blockchain, here financial products and services are programmable. On Blockchain where third party banks, financial institutions etc. Who plays the role of middleman, removing all these financial middlemen from the middle, allowing direct transactions between the two parties.
What is Traditional Finance?
If we keep our money as a deposit in the bank. So on the bank side we get some interest on the deposit money. Then the bank lends the same money to another person in the form of finance, and the bank takes interest on it, so let’s see an example. There are two persons named ram and sham, ram has extra money and ram wants to earn interest on that money. So Ram deposits that money in the bank. Bank gives monthly or yearly interest to them through FD or any other scheme scheme.
On the other hand sham who want to open business, but sham does not have that much money to start business. So sham can go to the bank. And by mortgaging your property, gold etc., you can take a loan from the bank. With which they can start their business easily. So it will happen here that the bank will take money from ram here and whatever interest is there, they will give it to ram at low rate and in return they will give ram money to sham at high interest rate. This is how traditional traditional finance works.
Where the bank borrows from one party, and gives high interest to the other party, which lends money by taking the bank’s own responsibility. So in this way bank works like centralized finance, and decentralized finance system works its opposite.
Difference Between Centralized Finance and Decentralized Finance
| Centralized Finance | Decentralized Finance |
| If you use any product or service of Centrally Finance. So for that you need to do KYC (Know Your Customer) first, like in example bank bank, insurance etc. | In decentralized finance you do not need any KYC. You can use any service without KYC. |
| Centrally Finance means here the institutes decide, to whom they want to give their services. Or whose services do you want to stop. So they have full central authority. | With Decentralized Finance you can enter Decentralize Finance from any country without any hindrance. |
| In centrally financed system you are not transparent, here if you deposit money once, after that you lose complete control of your money. You never know where your money is being used. | Same on decentralized finance censorship. This means that no one can censor or control you within Decentralize Finance and no one can stop you from using the Service. |
| You deposit, with the hope that when you withdraw or withdraw, your money will come to you safely, but sometimes you may have to face this kind of problem of corruption, fraud in the bank, your account being hacked. | Decentralized Finance is a complete open source blockchain platform. Where you can track your transactions on the blockchain foot, in this way you get the security of the transaction because blockchain technology is unhackable. |
Conclusion
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